No Turn Around, but Consolidation Featured

Overview:  After large moves yesterday, the capital markets ae quieter today. Stocks are mostly firmer, and the 10-year US yield is a little softer near 3.62%. Strong nominal wage increases in Japan and a hawkish hike by the Reserve Bank of Australia helped their respectively currencies recover, though remain within yesterday's ranges. The euro briefly traded below $1.07, and sterling has been sold through $1.20. That said, a consolidative tone is the main feature today through the European morning. 

Gold has steadied after falling $63 an ounce last week. News that China boosted its gold holdings for the third consecutive month should be placed within the context of its overall reserve growth. Consider that the dollar value of its reserve rose by nearly $56.8 bln last month. Its gold purchases were less than $800 mln. March WTI is recovering from yesterday's drop to a two-month low near $72.25 to approach $76 today. News that Saudi Arabia unexpectedly lifted prices for Asian customers ostensibly helped crude extend the recovery that began yesterday. US natgas is steady after snapping a three-day slide at the end of last week. 

Asia Pacific 

Winter bonuses helped lift Japanese labor cash earnings in December. Winter bonuses rose almost 7.6% year-over-year. wages rose 1.9%, the most since 1997. Labor shortages in what would be consider core services in the US, helped lift base pay in those sectors. Real wages rose by 0.1%, the first positive reading since last March. The spring round of wage agreements is anxiously awaited, but most economists look for something less than 3%, a threshold identified by the Bank of Japan, after a 2.2% increase last year. At the end of January, Japan reported a 1.1% rise in retail sales, exceeding the median forecast in Bloomberg's survey for a 0.7% increase. The November decline deepened in the revision (-1.3% vs. -1.1%). Household spending, a broader category, more like real US personal consumption expenditures, fell 1.2% year-over-year in November, the first such contraction since last May, and fell 1.3% in December. Month-over-month real spending fell 2.1% in December after a 0.9% contraction in November.

As widely expected, the Reserve Bank of Australia hiked its cash target rate by 25 bp to 3.35%. The RBA warned of further hikes in the "coming months." It expects CPI to come down to 4.75% this year from 8.4% in Q4 22 and to 2-3% by mid-2025. The formal monetary statement at the end of the week is expected to offer more insight, but the immediate takeaway was to lift expectations for the terminal rate to closer to 4.0%. The combination of stronger than expected inflation and optimism over the re-opening of China helped lift the Australian dollar by slightly more than 3.5% in January, to lead the G10 currencies. The sell-off, ostensibly triggered by the dramatic US dollar rally after the incredible jobs data has seen it fall nearly 2.4% here in February before today's bounce. The re-opening of China and an apparent rapprochement with Beijing may help Australia's trade going forward, but its exports fell in each of the last three months of 2022 and the trade surplus fell to a four-month low in December. Still, Australia is benefitting from the positive terms of trade shock. Consider that in 2022, it recorded a trade surplus of A$139.6 bln. In 2019, the surplus was about A$66.6 bln.

The dollar gapped higher against the yen yesterday and today has been confined to yesterday's range (~JPY131.50-JPY132.90). The gap, which has added significance as it appears on the weekly bar charts not just the daily, is found between JPY131.20-50. We suspect that it is what technicians refer to as a "normal" gap and will be filled shortly. Our target for the Australian dollar's pullback was $0.6850 ahead of next week's CPI. It nearly reached it yesterday (~$0.6855). The seemingly hawkish hike by the RBA has seen the Aussie recover but not above yesterday's high (~$0.6965). It may take a move above $0.7000 to lift the technical tone. The US dollar is also consolidating within the range seen yesterday against the Chinese yuan (~CNY6.7710-CNY6.8055). If it were a free-floating currency, we would note that the five-day moving average looks poised to cross above the 20-day moving average for the first time since last November. China reported its reserves rose to $3.184 trillion in January, the highest level since last March and the fourth consecutive increase. Valuation adjustments, given the dollar's decline. News that China boosted its gold holdings (~15 tons, which cost about $770 mln). To keep it in perspective, consider that the dollar value of reserves rose by about $57 bln last month. The PBOC set the dollar's reference rate at CNY6.7967. The median estimate in Bloomberg's survey was for CNY6.7948.

Europe

Germany and Spain reported December industrial production figures. The aggregate report for the eurozone is due on February 15. German output fell by a whopping 3.1%, well beyond the 0.8% fall expected. In line with expectations and the biggest drop since last March. Note that unlike the US, for example, German industrial production includes construction, which has been a particularly weak sector. The construction PMI average 41.6 in November-December last year, the weakest two-month period since May-June 2020 as Covid was ravaging and supply disruptions were widespread. For its part, Spain's industrial output snapped a three-month drop, rising 0.8% in December, well better than the 0.2% expected. Recall, Spain defied expectations that it contracted in Q4 22 and instead grew by 0.2%. Still, household consumption and business investment fell in Q4. The government has cut the VAT on many food items, subsidies to cushion the higher energy prices have been extended, and the minimum wage hiked (8% or about $100 a month).

France, hobbled by rail strikes today, reported a larger than expected December trade shortfall of 14.9 bln euros. The median forecast was for a 12 bln deficit. Last year, France recorded an average monthly trade deficit of 13.65 bln euros, which was nearly twice the average deficit in 2021 (~7.2 bln euros). Before Covid and the Russian invasion of Ukraine, the average monthly deficit in 2019 was about 4.8 bln euros. The current account deficit widened to what appears to be a record of 8.5 bln euros in December and brings the 2022 deficit to 50 bln euros from a surplus of about 8.6 bln euro in 2021 and 12.8 bln euros in 2019.

Our target for the euro of $1.07 ahead of next week's US CPI was not aggressive enough. The euro briefly dipped below there today before steadying the in European morning. Initial resistance is now seen near $1.0750. A convincing break of the $1.07 area would target the $1.0615 area next. Sterling also extended yesterday's losses and to trade to almost $1.1985. We have suggested a retest of last month's low near $1.1860 was possible before the US CPI. Ahead of that, we note the 200-day moving average is near $1.1950 today.

America

In terms of market reaction, the US trade figures have been eclipsed by the employment report and the CPI. Moreover, we already know that net exports added about 0.8 percentage points to Q4 GDP. However, this does not appear likely to repeat itself soon. The advanced December report on merchandise trade signals a deterioration. The merchandise deficit rose to $90.3 bln from $82.9 bln in November. Still, through November the US trade deficit averaged $80.6 bln a month last year and averaged $70.4 bln in 2021. In 2019, before Covid struck, the average monthly trade shortfall was about $46.6 bln. Even though some producers use China as an export platform for shipments back to the US, the US trade deficit with China averaged nearly $32.7 bln a month through November last year. The US deficit averaged $29.5 bln in 2021 and $28.6 bln in 2019.

Canada reports its December merchandise trade balance. The surplus, which surged to nearly C$4.2 bln last May, has been shrinking. In fact, it fell into deficit in November (small, C$41 mln deficit). The surplus is the Sept-Nov period was C$216 mln, but for the first 11 months of 2022, it averaged $1.8 bln. A C$500 mln deficit is the median forecast in Bloomberg survey for December. Nevertheless, we find the Canadian dollar more sensitive to the general risk environment and periodically, the change in oil prices, than its monthly trade figures.

Fed Chair Powell will be interviewed at the Economic Club in Washington at midday. His reaction to the jobs data may be of most interest. Atlanta Fed's Bostic said yesterday IF the economic strength were to persist, the Fed funds terminal rate would likely be higher. President Biden's State of the Union address will be delivered later today. The press reports it will include a billionaire tax and a proposal to quadruple the tax on share buybacks.

We saw potential for the dollar to rise toward CAD1.3550 ahead of next week's CPI. It reached CAD1.3475 yesterday and is trading within yesterday's range (~CAD1.3390-CAD1.3475) so far today. There are options for around $900 mln struck in the CAD1.3480-CAD1.3500 area that expire today. We note that the five-day moving average is set to cross above the 20-day moving average today or tomorrow for the first time since late December. Initial support is seen in the CAD1.3370-90 today. We had projected the dollar to rise into the MXN19.30-50 area. The greenback briefly traded above MXN19.29 yesterday. It is consolidating in a narrow range between roughly MXN19.07 and MXN19.18 today. We anticipate it holding above MXN18.99. 

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